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Cost analysis

Getting the costs right for a policy intervention is crucial in ensuring value for money.

When the project is an investment, cost analysis will involve working with the teams scoping the project. We compare costs with past similar projects, and then working with the project managers to clarify the exact scope. We may also look at the cost modelling undertaken as bids to undertake the work are made. We have been involved in designing cost estimating strategies, where teams can plot out maturing the budget, getting buy-in from key participants and establishing contingency needed to cover risks. Cost analysis might also look at operational costs, where estimation and modelling will be based on the current operation. Then, the cost savings associated with change projects or re-organisations might be crucial. Cost analysis will also involve working with partners, experts in cost accountancy, cost engineering and forecasting.

Strategic cost estimation

In a public sector procurement, getting an accurate picture of a project’s cost is crucial for the main approval. It varies across policy areas, but – usually – some sort of business case with costs (and benefits) will go to decision makers and the cost estimates in this will need to be robust. The cost of a project often matures incrementally with the development of the business case. You may be quite lucky, knowing at the outset what something will cost because you have done it a number of times. But when the project involves delivering something innovative, or where the requirement is changeable, estimating costs may be helped by having a cost estimating strategy.

In no particular order, except how they materialised in a recent project, the key things about such a strategy are:

Engage, engage, engage.

Get buy-in from the key players.

Plan the maturing of your cost assumptions (one of the three has to be techie!).

The first aspect is that in a project which is innovative, those estimating costs should talk to the option designers frequently and in a structured way. The designers will be working on the fly when developing the business case. In addition, they, sometimes, can be quite segmented across the project. The engineers developing a particular aspect may be in industry or there may be specific technical research being done in a research lab. Costs for future implementation may not be a key part of this thinking. Engaging will both raise the profile of estimating how much something will cost and also ensuring any estimates are done in a manner that can be used by cost estimators. To get the engagement started, we found doing a structured interview was a vital first step. It painted a picture of the key objectives and goals of the various players.

To get buy-in from the key players in a project, you ideally want to put cost estimating in their to-do list as they work on their part of the business case. We found having good governance around the assumptions about cost is really important. What does this mean? Essentially, as you engage with the engineering team, they may explain that some particular parts of the project are going to be novel or risky and the costs will only become certain as they do more scoping and developing. It is then vital to get someone in the team to own the conveying of that improved understanding as it occurs to the cost modellers.

A final part of the cost estimation strategy is to plan for the improving of the data underpinning the costs. Developing a business case for a complex, innovative project could take a couple of years. It is helpful to set targets for the quality of the cost data assumptions during this long time, allowing those owners of data assumptions to manage their development. We found you also then needed to support the owners and find swim lane diagrams very helpful in this.